Calulations

If rRF(risk free rate of return)= 3%, rM (Market rate of return) = 8%, and b (beta)= 1.2, what is the required rate of return on the firm’s stock? (Hint: use the SML

If rRF (risk free rate of return) = 3%, rM (Market rete of return) = 8%, and b(beta)= 1.2, D0 (dividend today) = $2 and g (growth rate of dividend) =4% (constant), how much is the stock price)?

Calculate the WACC which represents the “hurdle rate” for a typical project with average risk using midpoint of the range of the marginal cost of common equity using retained earnings or new earnings.

Data:

A 15-year, 12% coupon, semiannual payment non-callable bonds sell for $1,153.72.  New bonds will be privately placed with no flotation cost.

A 10%, $1,000 par value, annually dividend, perpetual preferred stock sells for $1,111.

Both an existing common stock and a new common stock issue, which incurs a flotation cost of 15% of the proceeds, sells for $50. D1 = $4.3995 and g = 5%. b = 1.2; rRF = 7%; RPM = 6%.

Bond-Yield Risk Premium = 4%.

Target capital structure:  30% debt, 10% preferred, 60% common equity.

Tax rate is 40%.

HINTS: Use the formula, WACC  = wdrd(1 – T) + wprp + wcrs